TEXT-Fitch cuts Abertis Infraestructuras S.A. to 'BBB+'

(The following statement was released by the rating agency)

Aug 31 - Fitch Ratings has downgraded Abertis Infraestructuras, S.A.'s
(Abertis) Long-term Issuer Default Rating (IDR) and senior unsecured
notes to 'BBB+' and removed them from Rating Watch Negative (RWN), where they
were placed on 8 June 2012. The agency has affirmed the Short-term IDR at 'F2'.
The Outlook on the Long-term IDR is Negative.
The downgrade primarily reflects Fitch's view that business risk associated with
Abertis has heightened, as its recourse EBITDA has come under increasing
pressure and it has become increasingly dependent on subordinated dividends from
non-recourse investments. The Negative Outlook reflects the company's exposure
to any deterioration in Spain's rating resulting from a further weakening of the
Spanish economy.
Abertis' ability to manage leverage and liquidity over the past couple of years
has largely relied upon its ability to divest itself of non-recourse-funded
assets regardless of the operating performance of its core recourse-funded toll
road, telecoms and airports businesses. While a portion of asset disposal
proceeds have been used to delever its corporate balance sheet, funds have also
been used to expand its non-recourse asset portfolio. Fitch considers the
company is becoming more dependent on dividend flows from such non-recourse
businesses to support its recourse operating cash flows, with current management
forecasts expecting 17%-21% of aggregate recourse EBITDA plus dividends from
non-recourse businesses comprising such dividends over 2011-15 (12-14% forecast
last year for the period 2011-2014).
Fitch considers holding companies that rely on dividend flows from investments
to entail greater business risk than pure infrastructure operating companies for
the following reasons:
- All else being equal, dividend flows from holdings in non-recourse business
interests are generally less predictable than infrastructure company operating
cash flow;
- It is more difficult to predict the evolution of a company that trades
holdings in other companies, as investment strategies can change quickly; and
- Regardless of the stability of the underlying business operating performance,
holding company performance may be more closely related to the price at which
investments in such businesses are traded, and so the holding company's cash
flow may not directly benefit from the inherent resilience of the underlying
infrastructure assets.
Abertis' recourse cash flow is exposed to Spanish economic conditions. All
recourse toll roads (64% of recourse revenue) and telecoms (22%) investments are
located in Spain, and only its recourse airport businesses (14%) do not have
operating exposure to the country. In particular, traffic on its toll roads has
declined by 24% since the start of the global economic downturn in 2008, and
Fitch expects further declines as the Spanish economy continues to stagnate. To
date, Abertis has been able to levy increased tariffs and manage operating and
capital expenditure for the roads to maintain stable or growing EBITDA, despite
the harsh conditions. However, Fitch expects that the company's flexibility to
manage costs will be reduced going forward.
Approximately 42% of 2012 recourse revenue is forecast to be derived from the
Aumar and Acesa toll road concessions, whose concession terms are due to end in
2019 and 2021, respectively. Overall, the weighted average concession life of
Abertis' recourse toll roads is 11 years, significantly shorter than other major
European toll road operators (Atlantia S.p.A: 26 years remaining and Brisa
Concessao Rodoviaria, S.A.: 23 years remaining), although other of its recourse
assets are owned on a perpetual basis. Fitch understands that Abertis is
currently considering its options for these assets. Unless Abertis' recourse
asset base is strengthened, it will be imperative for the company to continue
reducing recourse leverage significantly over the coming years to prevent
further negative rating action.
In addition to the company's intrinsic developments, which are the key drivers
for the ratings, Fitch believes the Spanish sovereign rating needs to be taken
into account and monitored. When placing Abertis' ratings on Rating Watch
Negative on 8 June 2012, the agency noted that to assess the impact of the
downgrade on the Republic of Spain's rating to 'BBB'/Negative/'F3' on 7 June
2012, it would assess four key factors:
- The impact on Abertis's Spanish business of the weakening Spanish economy;
- The company's ongoing acquisition and divestment activity on its operating and
financial profile;
- Its ability to manage refinancing and liquidity risk over the next two years;
- Its ability to deleverage in line with Fitch's previous assumptions.
Fitch's special report entitled "Rating Impact of Euro Sovereign Downgrades on
Project Debt," (dated 19 July 2011 at www.fitchratings.com) explicitly sets out
the conditions determining whether an infrastructure company's debt rating could
be considered linked to that of the sovereign state in which the project is
located. These include direct counterparty exposure to the sovereign; reliance
on domestic capital and banking markets; operating exposure to the country's
economic conditions; and the risk of the sovereign taking unilateral measures
detrimental to the company.
Beyond its operating exposure, Abertis' exposure to Spain is limited: its
liquidity profile over the next two to three years is strong, even when
discounting support provided by Spanish banks. Fitch calculates that debt
maturities arising beyond the end of 2014 are fully covered on this basis.
Furthermore, although the Spanish government is a counterparty to Abertis with
respect to a compensation payment agreed for traffic underperformance on the
AP-7 toll road, Fitch expects this to be paid from proceeds raised from the
re-tendering of the Acesa concession at maturity in 2021, when the compensation
payment is due, thereby removing the company's direct exposure to the
government's balance sheet.
Considering the limited nature of Abertis' current exposure to Spain, Fitch has
concluded that Abertis' rating should not be explicitly linked to the Spanish
sovereign rating, which may be affected by numerous factors not relevant to
Abertis. Nevertheless, if Spain's ratings were downgraded due to a further
weakening of Spanish economic conditions, it would likely lead to another
downgrade of Abertis' ratings. Given the current Negative Outlook on the
sovereign's rating, Fitch considers a Negative Outlook on Abertis' rating to be
appropriate.
Fitch stated in November 2011 when it affirmed Abertis' ratings that an increase
in leverage, measured as net debt to recourse EBITDA plus dividends, to above
5.0x would lead to a negative rating action. Since then, in light of weaker
economic conditions in Europe generally, in the context of the shortening life
of Abertis' recourse toll road concessions, and given the company's increasing
dependence on dividends from non-recourse investments, Fitch has revised its
view. Should the company's leverage increase to above 4.0x over the next two to
three years without increasing the size and quality of its recourse asset base,
then a further negative rating action may result. Conversely, if the company is
able to strengthen its recourse asset base, if economic conditions in Spain
stabilise and recourse toll roads experience a stabilisation in operating
performance and if the company is able to maintain leverage in line with the
Fitch rating case, reducing it to around 3.0x over the next two to three years,
then this could lead to a positive rating action.
(Caryn Trokie, New York Ratings Unit)